Regulatory Distortions in Transportation and Telecommunications

Citation

Sparling, Lee Ira (1980) Regulatory Distortions in Transportation and Telecommunications. Dissertation (Ph.D.), California Institute of Technology. doi:10.7907/fakr-sw94. https://resolver.caltech.edu/CaltechTHESIS:06292020-133842001

Abstract

The first of three papers corrects two flaws in the literature on traffic misallocation under rate regulation by the ICC. First, it is shown that, contrary to suggestionsin several recent studies, the comparative-cost approach, which determines an efficient allocation by assigning all traffic in a class to the low-cost mode, does not necessarily overstate the welfare loss on misallocated traffic. Second, Levin's modal-split procedure was applied to data for 1963-64. Although the modal-split concept, in which an efficient traffic distribution is derived from the demand function, has been applied several times, the different procedures make comparisons over time difficult. Comparing Levin's results for 1972 with those obtained here indicates that the extent and the cost of the traffic misallocation have declined.

The second paper attempts to determine the pricing and welfare effects of competition and regulation in a transportation network. The pricing and input (car assignment) decisions of a railroad monopolist subject to common carrier and round-trip constraints are determined. Then competition is introduced by shifts in rail demand and regulation as a set of constraints on pricing that are based on costs observed in the network. Both competition and regulation can cause peak (fully-loaded) directions to change, and the welfare effects can be negative.

The final paper examines the effect of jurisdictional cost separations in telecommunications on input use by the profit-maximizing firm. In an Averch-Johnson formulation of the problem, separations can alter some of the expected factor use relationships. In addition, the firm has an incentive to employ unproductive inputs in a jurisdiction that has no productive input specifically assigned to it. But because the Averch-Johnson model is an unrealistic characterization of the regulatory process, a model is developed in which the regulator explicitly sets prices on the basis of the firm's profitability in a previous period in his jurisdiction. Since the firm can influence future prices by its input choices in the present period, it may choose to hire unproductive inputs. Moreover, the cost separations process distorts factor use relative to a multi-product firm regulated on the basis of overall profitability.

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